Deutsche Bank AG Carbon markets in a downturn Mark C. Lewis Managing Director Commodities Research Deutsche Bank mark-c.lewis@db.com Paris, September 2009 Deutsche Bank AG/London All prices are those current at the end of the previous trading session unless otherwise indicated. Prices are sourced from local exchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank and subject companies. Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Independent, third-party research (IR) on certain companies covered by DBSI's research is available to customers of DBSI in the United States at no cost. Customers can access this IR at http://gm.db.com, or call 1-877- 208-6300 to request that a copy of the IR be sent to them. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1 July 2009 page 1
Contents KYOTO MECHANISMS AND THE EU-ETS: THE YEAR OF LIVING DANGEROUSLY -- EU-ETS COMPLIANCE BUYERS DRIVING CDM and JI -- WHAT S THE POINT OF THE EU-ETS? -- EMISSIONS IN REMISSION -- THE LONG AND THE SHORT OF IT HOW LONG IS A PIECE OF STRING? THE GLOBAL UPSIDE FOR CARBON MARKETS July 2009 page 2
The Current Value of the Global Carbon Market Current policy framework has two main pillars: Kyoto and the EU-ETS. Total size of the Global Carbon Market in 2008: $126bn. Of this, the ETS accounted for $92bn, and Kyoto mechanisms $34bn. CCX ($309M) EU ETS ($92bn) Asia 83% of all CDM projects* * Projects that issued credits Kyoto related South America 16% of all CDM projects* Africa 1% of all CDM projects* New South Wales ($224M) * Projects that issued credits Source: World Bank, Unep Risoe, Deutsche Bank
Carbon price ( /t) Isabelle Curien, isabelle.curien@db.com September 2009 page 4 from Datastream Historic CERs/ERUs prices correlations with EUAs Up to 75% of the CERs/ERUs transactions on the market relates to purchases by or on behalf of installations in the EU-ETS with compliance obligations to cover most of the turnover in CERs at the moment is being driven by ETS compliance requirements this explains why there has until now been such a close correlation between EUA and CER prices 35 30 25 20 15 10 5 0 Jan-08 Mar-08 May-08 Jul-08 Sep-08 Nov-08 Jan-09 Mar-09 May-09 Jul-09 Sep-09 CER EU Emission Certificate (Dec 09)
The policy objecives of the EU-ETS The overriding objective of EU climate policy is to limit the increase in average global temperatures to <2 C above pre-industrial levels. The ETS is there to generate a clear, undistorted and long-term carbon price signal and so help achieve this policy target. To this end, there are three main dimensions to the ETS role: 1. To help achieve the EU s 2020 GHG-emissions-reduction target 2. To promote CCS technology in the power sector such that it becomes the new entrant of choice by 2020 3. To help foster a genuinely global carbon market June 2008 page 5
(M t CO2) 20% of Final Energy Consumed from Renewables by 2020 The EU is now committed to ensuring that (i) 20% of its final-energy consumption comes from renewable sources by 2020 The EU estimates that the annual emissions savings would be 400Mt (ii) to incentivising the construction of 12 large-scale CCS plants by 2015. We estimate that this could lead to emissions reductions of approximately 35Mt per year by that time assuming 5.4GW of total CCS capacity. zero-carbon energy sources BOTH will have to increase their share of overall global power output The problem at the moment remains one of cost Wind offshore Wind onshore Tide & Wave Solar Thermal Electricity Photovoltaics Hydro largescale Hydro smallscale Geothermal electricity Biow aste Solid Biomass Biogas 1200 1000 800 600 400 200 0 1997 Historical development 1999 2001 2003 2005 Future development 2007 2009 2011 increase by about 400TWh over 2010-20 2013 2015 2017 2019 Wind offshore 800 Wind onshore 700 Tide & 600 Wave 500 Solar Thermal Electricity 400 Photovoltaics 300 Hydro largescale 200 Hydro smallscale 100 Geothermal 0 electricity Biow aste Source: European Commission Solid Biomass Biogas 2005 2006 2007 2008 2009 Avoided CO2 emissions due to RES plant 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 140Mt from the heating, cooling, and transport RES -T RES -H-non grid RES -H- district heat 200Mt RES -E& from H- the CHPpower sector RES -E- Pure Pow er Source: European Commission
(%) Our estimates for the conventional fossil-fuel technologies assuming a carbon price of 25/tonne Breakdown of costs for fossil-fuel plant with CO2 at 25/tonne (%) 3 2 4 Euro 79.3 M W/ h Euro 71.1 M W/ h Euro 90 M W/ h Euro 64 M W/ h 1 100% 90% 80% 70% 11% 13% 3% 26% 54% 64% 60% 50% 40% 30% 72% 1% 40% 8% 1% 18% 9% 20% 10% 0% 16% 25% 27% 11% GAS COAL CCS NUCLEAR Fuel Cost Fixed opex Variable opex Capital costs Cost of Carbon
(%) Our estimates for the conventional fossil-fuel technologies assuming a carbon price of 40/tonne Breakdown of costs for fossil-fuel plant with CO2 at 40/tonne (%) 2 2 3 Euro 82.3 M W/ h Euro 82.3 M W/ h Euro 90 M W/ h Euro 64 M W/ h 1 100% 90% 17% 80% 70% 12% 3% 36% 54% 64% 60% 50% 40% 30% 20% 10% 0% 35% 1% 68% 18% 1% 9% 7% 16% 22% 27% 11% GAS COAL CCS NUCLEAR Fuel Cost Fixed opex Variable opex Capital costs Cost of Carbon
It Takes CO2 to Contango: Our previous forecasts (May-Oct 2008) EU Cap (MtCO2) 2,083 1,720 Rise in temperatures < 2 C 2008 2012 2020 banking Phase 2 Phase 3 banking CO2 price( /t) Borrowing not allowed Borrowing not allowed 67 Long Run abatement supply curve ordinarily in Contango Risk of backwardation 67 /t Risk of backwardation 40 40 /t Average residual abatement over 2008-20: 125Mt p.a. CO2 * * * Fuel switching (65 Mt p.a.) up to 60 GW of new CCGT required * * * * * * * * * * * * In power-plants CCS plant EUA & CER/ERU use Large use of carbon credits : 2,163M EUAs, CERs, ERUs p.a fewer carbon credit available : 1,971M EUAs, CERs, ERUs p.a * * *
Deutsche Bank AG Contango downgraded: Our previous forecasts (until Dec 2008) EU Cap (MtCO2) 2,083 1,720 Rise in temperatures < 2 C 2008 2012 2020 banking Phase 2 Phase 3 banking CO2 price( /t) Borrowing not allowed Borrowing not allowed 48 Long Run abatement supply curve ordinarily in Contango Risk of backwardation 48 /t Materially lower risk of backwardation than previously 30 30 /t Average residual abatement over 2008-20: 86Mt p.a. CO2 * * * Fuel switching (65 Mt p.a.) up to 25-30 GW of new CCGT required * * * * * * * * * * * * In power-plants CCS plant EUA & CER/ERU use Large use of carbon credits : 2,118M EUAs, CERs, ERUs p.a fewer carbon credit available : 2,026M EUAs, CERs, ERUs p.a CCS plant no longer competitive by 2020 * * * July 2009 page 10
EU-23 distribution of EUA deficits and surpluses by sector (Mt) 100,0 50,0 0,0 Coke Glass -50,0 Refinery Power stations Cement Iron & Steel Metalic ore Pulp & paper Ceramic -100,0-150,0-200,0 Source: European Commission, Member State NAPs, Deutsche Bank; Based on data of installations that released their 2008 verified emissions and for which we have allocation data July 2009 page 11
Power sector s 2008 net EUA position incl. auctioned EUAs (Mt) 10,0 0,0-10,0 Bulgaria Belgium Austria???? Cyprus Finland Estonia Denmark France Ireland Hungary Greece Latvia Italy Malta UK Sweden Spain Slovenia Slovakia Romania Portugal Poland -20,0-30,0-40,0-50,0-60,0-70,0-80,0 Czech Rep Germany Luxembourg Lithuania Netherlands, European Commission, NAPs; Based on data of installations that released their 2008 verified emissions and for which we have allocation data July 2009 page 12
DB projected aggregate net position of ETS sectors, 2008-12 (Mt) All other sectors combined NET ETS position before unused NER allowances Unused NER allowances Power sector Assumed net position in 2008-180 +90-90 +65 Implied net position in 2009-143 +190 +47 +65 Implied net position in 2010-158 +140-18 +65 Implied net position in 2011-194 +130-64 +65 Implied net position in 2012-208 +100-108 +65 TOTAL 2008-12 -883 +650-233 +325 July 2009 page 13
RWE: % of German electricity output over 2008-12 already sold Phase-2 of ETS 2008 2009 2010 2011 2012 Weighted average over entire Amount of total expected power output already sold 100% >95% >80% >45% >20% 2008-12 period >68% Source: RWE July 2009 page 14
RWE s net EUA position over Phases 1 & 2 of the ETS RWE carbon shortfall over 2008-12 and 2013-20 (Mt/y) 160-170 +100 158 35 145 27 140 +/ - 5% 123 118 Free allocat ion (post auct ioning) ca. 60% =ca. 80 M t +/ - 5% 60-70 2007 CO2 Emissions 2007 CO2 Certificates Granted Expected range of CO2 emissions 2008-12 Expected CO2 certificates granted 2008-12 From contractually secured capacity From ow n pow er plants 2008-12 2013-20 2013 Source: RWE Source: RWE July 2009 page 15
EUA surplus over Phase 2 if full NER used (Mt) EUA deficit of incumbents over Phase 2 120 100 80 60 80 60 40 20 40 20 0-20 -40 0-20 -40-60 -80-100 -60 2008 2009 2010 2011 2012-120 2008 2009 2010 2011 2012 Gap to total cap Average gap to total cap Emissions gap to EUA cap for existing installations Average gap to cap for existing installations July 2009 page 16
German nukes to close by 2013 under existing legislation: 7GW to come offline This would equate to 53TWh of lost CO2-free output by 2013 Unterw eser (1,345MW) Philippsburg-1 (890MW) Isar-1 (878MW) Brunsbüttel (771MW) Biblis B (1,227MW) Biblis A (1,167MW) Neckarw estheim-1 (785MW) Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 2013 2012 2011 2010 0 10 20 30 40 50 60 T W h July 2009 page 17
Carbon emissions (Mt) Carbon emissions (Mt) DB estimate of increase in ETS emissions from nuclear phase-out, 2009-13 and 2014-20 DB estimate of increase in ETS emissions from changing German capacity mix under nuclear phase-out, 2009-20 35 30 25 20 15 10 5 70 60 50 40 30 20 10 0 2009-13 2014-20 0 Best-case Base-case Worst-case Best-case Base-case Worst-case Best-case Base-case Worst-case July 2009 page 18
Over the longer term, it still takes CO2 to contango Ultimately, new power-generation capacity will probably still be needed, which implies a carbon price of 25-30/t already today based on a long-term oil price forecast of $85/bbl, and a long-term coal-price forecast of $125/t carbon price ( /t) 75 70 65 60 55 50 45 40 35 30 Materially lower risk of backwardation than previously 30 31 32 34 35 36 38 39 41 43 44 46 48 50 52 cost of carry 4% 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 54 56 58 61 63 66 68 71 July 2009 page 19
How the Global Carbon Market Might Look in Future Potential total size of the Global Carbon Market by 2010E $175bn by 2020E $1,000bn Regional Markets in North America and Australasia will likely bolster demand for CERs Regional Trading Schemes EU ETS CDM Hosting Countries Regional Trading Schemes CDM Hosting Countries Potential future linking opportunity Linking via Kyoto project mechanisms CDM Hosting Countries Regional Trading Schemes July 2009 page 20
Deutsche Bank Appendix 1 Important Disclosures Additional Information Available upon Request IN ** T ND ENT "** For disclosures pertaining to recommendations or estimates made on a security mentioned in this report, please see the most recently published company report or visit our global disclosure look-up page on our website at http://gm.db.com. Analyst Certification The views expressed in this report accurately reflect the personal views of the undersigned lead analyst(s). In addition, the undersigned lead analyst(s) has not and will not receive any compensation for providing a specific recommendation or view in this report. Mark Lewis July 2009 page 21
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